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Investing in employee health pays off Small businesses can improve employee health and productivity by participating in the University of Minnesota Wellness Works Project. To learn about free technical assistance, contact Claudia Egelhoff (phone: 612-377-3241; email cegelhof@umn.edu) or visit wellnessworksproject.org.

When it comes to transitioning the family owned manufacturing business, there is not a “one size fits all” solution. There are many different business strategies for exiting, i.e. limited liability company, trusts, estate plan strategies, private equity.

While Minnesota manufacturing firms feel pressure on several fronts in the current economy, it is not surprising that many of their issues are employee-related. Some of the most significant challenges include finding employees with the necessary skills, addressing low morale associated with lower headcounts, training employees to be more efficient and productive, and keeping talented employees engaged as more jobs become available in the local market.

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Located in Ham Lake, North Anoka Control Systems Inc. (NACS) manufactures complete automation/robotic systems. Applications include assembly (parts feeding and material handling with inspection at each stage of assembly), medical-device manufacturing, web handling (winding, unwinding, tension control and marrying webs), and quality control machines (recording and managing data).

Founded more than twenty years ago, NACS has a comprehensive staff of electrical, mechanical and software designers, project managers, and in-house fabrication and assembly technicians. NACS’ early years were spent diversifying and refining its manufacturing capabilities. More recently, the NACS leadership realized that the time had come to create an organizational process that would solve problems with a forward-thinking (proactive) approach. The company terminology for this approach is “Enterprise Excellence.”

To launch the Enterprise Excellence initiative, NACS appointed Brian Swanson as “Director of Enterprise Excellence.” One of the foundations of this strategy was the realization that company employees are the most critical company assets. To some that may sound odd, but by empowering its own workers with that kind of respect, NACS engendered a culture of creativity, partnership – and, ultimately, success.

The first step was to interview NACS employees to find out what they perceived as company strengths and to discover areas where improvement was needed. No attempt was made to filter the comments—just collect them. All of the comments were gathered and transcribed on post-it notes. Once their own staff had been canvassed, NACS representatives interviewed key customers to elicit their candid opinions. Again, no attempt was made to filter the comments. After the interviews were complete, all of the comments (hundreds of them) were posted on the walls in a conference-room, then rearranged into affinity groups. Eventually, the management team saw an order begin to emerge that led to specific “Enterprise Excellence” initiatives: 1) “Voice of the Customer” 2) “Strategic Business Management” 3) “Value Focused Processes” 4) “Attitude of Excellence” 5) “Empowered Workforce” 6) “Continuous Improvement.” These initiatives are all aimed at creating a company culture centered on excellence and creative problem solving.

For NACS, the metric that best gauges the effectiveness of the Enterprise Excellence initiative is “lead-time.” NACS has reduced lead times more than 30% in the last three years. Nowhere is lead-time more critical than in the hyper-competitive world of medical device manufacturing. After making significant progress internally, NACS made a discovery. They found that their machines – completed and delivered on time or ahead of schedule – were often sitting on the clients’ floor waiting for resources to complete FDA/ISO validation processes. As a result, NACS proactively embraced the challenge of helping clients’ through the validation process. For example, it sent three of its staff through the ISO 13485 (Medical Devices Quality Management Systems) “lead auditor certification” process. Through this type of commitment, NACS was able to fully understand ISO 13485 requirements and apply them to the business in a way that was truly meaningful and added value. NACS is now positioned to take some of the burden of the FDA/ISO validation process off the back of the client and offer it as an extension of their machine-building service.

Hopefully, creativity and openness at NACS comes through in this story. Brian credits the Manufacturers Alliance (MA) with part of that success and says, “The MA has been invaluable to me in my career. I would even go so far as to say more valuable than my college education. Probably the most valuable aspect are the tours. I’ll share a few examples. One is that we work with very complicated machines – which are built one component at a time. Sometimes the flow can be confusing. After touring an MA group through our facility, one of the tour participants suggested attaching schematics of all the parts to the cell-walls in a sequential flow. As obvious as that sounds, we hadn’t thought of it. It was a great solution. Another example is that part of our jobs are to be trouble shooters. One way to do that is to visit each of the cells on a regular basis. Not only is that time-consuming, it may be perceived as intrusive. We have a very professional and talented staff and they might be understandably irritated by over-the-shoulder-looking. On one of the MA benchmarking tours, we saw a simple trouble-shooting system using little flags (green/yellow/red) above each cell. Now, I can simply look out on the floor and visually identify who needs help – and who doesn’t. It’s been a HUGE time saver and enthusiastically embraced by all. The MA has been a great resource for us.”

When it comes to transitioning the family owned manufacturing business, there is not a “one size fits all” solution. There are many different business strategies for exiting, i.e. limited liability company, trusts, estate plan strategies, private equity.

To pick the right exit, you really have to be in tune with the purpose of transitioning the business. Once you know the purpose of the transition, you can begin to select the best set of alternatives to even consider.

According to Doug Portmann, the owner of Modern Molding, Inc., prior to taking the first step toward any plan for an exit, he wanted to create a sustainable business model. Portman believes that “to make Modern Molding, Inc. interesting to any investor - family member, employee group or third party – I need to concentrate on creating a model for continuous and profitable growth.” While this long range view point may sometimes require short term sacrifices, Portmann says “If I were the buyer, I would be most concerned with long term results and year over year progress.”

In order to accomplish this, Modern Molding, Inc. which provides custom-made thermoplastic injection molded parts, has cultivated a management team which allows the business to operate without Portmann. He says “One thing I know for sure, I am probably not going to be working for the ultimate buyer of my business. So the development of a management team has been the most important aspect of my succession plan. With a well-developed management team, which makes me replaceable, I have all of the exit options I will ever want to keep open.”

Portmann has family members, some who are involved in the business, key employees and interested investors, all of whom are candidates for the eventual sale. Portmann says, “with my succession plan, I even remain open to a third party acquisition, like a competitor or private equity group.” Having established a model and management team to operate it, Portmann is “now in the process of considering who I really want to sell to, if anyone.“ Considering who you want to sell to normally involves looking at the next generation, employees, third parties, competitors, investors.

Portmann and any seller will want to consider whether they should assume the next generation and/or key employees would prefer the lifestyle enjoyed by the current owner. Do they have the skills to manage or grow the business? Do they have available resources, or access to resources, to complete the purchase? Do they have the ability to deal with the stress of operating the business? Are they equipped to mentally carry the weight of your retirement on their back? If you, as the primary owner of a family owned manufacturing business, want to transfer the business to the next generation, what impact will this have on your family and the relationships between effected siblings? It is not unusual for a transition to the next generation to be fraught with family tension.

After you get through the family dynamic issues, you need to understand what you, as the seller, need out of the transaction. There are several options. Are you trying to place a sacred asset in the hands of a trusted employee or offspring for the purposes of perpetuating an income for both of you [consider a private annuity, self cancelling installment note]? Are you trying to provide a livelihood for your children or grandchildren while retaining control [consider a grantor retained annuity trust]? Are you trying to reduce the value of your estate, while retaining control of the business, so that you will not be paying as much [or any] estate tax [consider a family limited liability company]?

Are you trying to perpetuate the business for the benefit of your descendants who are employees, as well as all of your other employees [consider an employee stock ownership plan or buy/sell agreement]? Are you only interested in creating a guaranteed buyer in the event of your death? Is it a combination of the above? Once you can answer these questions, you can begin to determine which exit alternatives will facilitate your goals and start planning your exit with purpose.

At the initial stages of planning for your exit, perhaps while even developing an economically viable business model, you should consider the immediate impact of unplanned events. The foundation of a good succession plan starts with a Buy/Sell Agreement the with key players. Having a Buy/Sell Agreement arranges for the perpetuation of the business for the benefit of its stakeholders [employees, family members, vendors, customers] upon the occurrence of a triggering event, i.e. death, disability, financial impairment. The Buy/Sell Agreement provides liquidity for the estate by selling it at a predetermined price, formula or appraised value.

Typically, buy/sell agreements for family-owned businesses involve less than all descendants and often involve non-family members. These are generally funded with insurance products, including permanent life insurance and disability insurance. Permanent life insurance is used so as to be able to fund both death and non-death triggering events. Even though death is the most important trigger for the pre-exit succession planning exercises, most prospective buyers will want to have a right of first refusal.

The next article in this series of business succession for the family-owned manufacturing business will focus upon different strategies or techniques associated with transfers to family members.

Looking for a good investment? Invest in the development of your front-line leaders, with the added benefit of having them learn with their peers from other manufacturing companies.

In case you haven’t heard, Manufacturers Alliance has restructured and updated its supervisory training. Two new 3-day series are being introduced, with the added flexibility of each series available as a standalone workshop for those seeking targeted skills development.

A highlight of Leadership & Communication Essentials is training to develop Understanding and Working with Communication Style Differences. This workshop develops participants’ skills in recognizing and adapting to communication style differences (demonstrating Versatility). Versatility is defined as the ability to adjust behaviors in a given situation in order to maximize productivity.

Versatility could be demonstrated by having a fast-paced "tell" directed person recognize that when he/she is leading a meeting, especially with people more "ask" directed (people who need more time to think/process before they speak up), that they will get greater participation if they let people know ahead of time that they will be seeking input, provide them information to review in advance of the meeting, and remember to ask others for their thoughts prior to expressing their own ideas.

Versatility might also be shown by having a "people-oriented" person recognize when they are dealing with someone who is "task-focused" and know that they should set and comply with a meeting agenda, arrive on time and get down to business, and stick to the task at hand (minimize time spent on small talk).

Style Awareness and Versatility skills are critical for anyone in a leadership role who needs to get work done through others. Those who can recognize, appreciate and adapt to style differences are able to capitalize on the strengths of various styles and maximize collaborative efforts and team performance.

Research shows that managers with higher versatility outperformed low versatility managers on 46 of 47 performance measures. Specifically, the Managerial Success Study by the TRACOM group found that managers with high-level interpersonal skills (or versatility) show significantly higher performance than lower-level interpersonal skill counterparts:

Judy Hartley is head of Judy Hartley & Associates Leadership and Team Development. Judy has more than 20 years of hands-on experience developing the supervisory leadership skills of first-line/front-line leaders. She frequently works with organizations on in-house leadership and team development efforts plus Customer Service Excellence initiatives.

While Minnesota manufacturing firms feel pressure on several fronts in the current economy, it is not surprising that many of their issues are employee-related. Some of the most significant challenges include finding employees with the necessary skills, addressing low morale associated with lower headcounts, training employees to be more efficient and productive, and keeping talented employees engaged as more jobs become available in the local market.

This information was reported by over 150 participant companies in the 2011 Manufacturing Compensation & Benefits Survey conducted by Manufacturers Alliance and MPMA. These concerns are in addition to ongoing business challenges of finding ways to generate revenue and control costs.

For Heather Lintner, survey administrator and Principal at Denarius Human Resources, Inc, what was most interesting to note was the combination of hiring new employees and pay increases for current employees. Seventy-one (71) percent of firms surveyed reported that they plan to hire a small to moderate number of employees in the coming year, many in engineering and machine operator roles. The survey also found that reporting firms provided an average 2.7 percent wage increase in 2010 and project 3 percent in 2011. According to Kirby Sneen, Manufacturers Alliance Sales and Marketing Manager, “This reaffirms our belief that progressive manufacturers stay on top of employee compensation developments and use pay and benefits, in part, to attract and retain the best people.” Now is an excellent time to reevaluate your competitive position. And, the 2011 compensation survey is just the tool you need to do it.

Copies of the 2011 Manufacturing Compensation & Benefits Survey (PDF and bound formats) are now available for purchase. If you haven’t ordered your copy yet, contact Manufacturers Alliance at ma@mfrall.com or call 763.533.8239 to obtain your copy.

The mission of the Manufacturers Alliance is to provide peer-to-peer training, education, and resources which inspire manufacturing companies to continuously grow, improve, and stay competitive.